Tighter control of Bitcoin & altcoins needed
THE Bank for International Settlements (BIS) has issued a stark warning to central bankers.
“Authorities must be prepared to act against the invasive spread of cryptocurrencies,” said BIS general manager Agustín Carstens. “They should protect consumers and investors,”
The meteoric rise of cryptocurrencies should not make us forget that central banks are stewards of public trust, Mr Carstens said.
In a lecture titled “Money in the digital age: what role for central banks?”, Mr Carstens stressed :”for money to keep its value, it must be backed by accountable institutions”.
“Private digital tokens masquerading as currencies must not subvert this trust,” he said.
Ironically, Mr Carstens did not mention that the BIS has been persistently critical of quantitative easing (QE) consequences. It has eroded faith in fiat currencies.
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The BIS and other critics of the Fed, the European Central Bank and the Bank of Japan are worried about the flood of QE money. QE has created speculative booms and busts in properties and commodities, stocks and bitcoin and altcoins, they say.
“Large price swings, high transaction costs and a lack of consumer and investor protection make cryptocurrencies unsafe. (They are) unsuited to fill money’s role as payment, store of value and unit of account,” Mr Carstens added.
“Central banks and financial authorities should pay particular attention to the ties linking cryptocurrencies to real currencies. (They must) ensure cryptocurrencies do not become parasites in the wider financial system.”
Access to legitimate banking and payment services should be limited to exchanges and products that meet high standards, Mr Carstens continued.
“This means ‘same risk, same regulation’ and no exceptions allowed.”
Mr Carstens cautioned that cryptocurrencies should “not become entrenched and pose a risk to financial stability”.
“Novel technology is not the same as better technology or better economics,” he said.
“While perhaps intended as an alternative payment system with no government involvement, Bitcoin has become a combination of a bubble, a Ponzi scheme and an environmental disaster,” Mr Carstens claimed.
“Bitcoin has some obvious flaws”. First, debasement i.e. new coins and tinkering with their algorithms’ parameters.
“Last year alone, 19 bitcoin forks came out, including bitcoin cash, bitcoin gold and bitcoin diamond. Forks can fork again, and many more could happen.”
Second, trust takes years to build, seconds to break and forever to repair. Historical experiences suggest that these “assets” are probably not sustainable as money.
Third, the volatility of bitcoin and altcoins show that they are an inefficient means of payment and “a crazy way to store value”.
Finally, “there are concerns related to tax evasion, money laundering and criminal finance.”,
Stephen Macaskill, president of the Blockchain Association of New Zealand, said that cryptocurrencies are currently in a volatile bear market. But he predicted that they would be a multi-trillion dollar industry by 2020.
“Some will reside in heavily regulated areas such as the US. Many will be launched outside the US due to regulation,” he said, adding that 30 percent of South Koreans own cryptocurrency.”
“The year 2018 is the year of security tokens – digital tokens on the blockchain that represent traditional securities such as corporate shares and bonds,” Mr Macaskill said.
This article was first published in The Business Times, Singapore
Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, will be published in coming weeks. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner.